Are DOE Loan Guarantees an Energy Policy Mistake?

The United States DOE Loan Guarantee Program has disbursed $30.7 billion and claims to have created or saved 62,350 jobs. The loan program has three categories:

Section 1703 of Title XVII of the Energy Policy Act of 2005 authorizes the DOE to support innovative clean energy technologies that are typically unable to obtain conventional private financing due to high technology risks.

Section 1705 is a temporary program designed to address the current economic conditions of the nation. It authorizes loan guarantees for certain renewable energy systems, electric power transmission systems and leading edge biofuels projects that commence construction no later than September 30, 2011.

The Advanced Technology Vehicles Manufacturing (ATVM) Loan Program consists of direct loans to support the development of advanced technology vehicles and associated components in the U.S.

The more publicized loan guarantee recipients include Solyndra, BrightSource Energy, Ford, Fisker, and Tesla. (See the more complete list of loan recipients at the end of this article.)

The Loan Program Office (LPO) has issued conditional commitments to 13 power generation projects with cumulative project costs of over $27 billion. This represents a greater investment in clean energy generation projects than the entire private sector made in 2009 ($10.6 billion), and almost as much as was invested in such projects in 2008 -- the peak financing year to date ($22.6 billion), according to the DOE.

President Obama has requested a $36 billion increase for the Title XVII Loan Guarantee program and appropriators will soon decide whether to increase its funding. The Senate is also considering the establishment of a new financing entity, known as the Clean Energy Deployment Administration (CEDA), that would subsume Title XVII and expand energy loan guarantees. The CEDA is essentially a "Green Bank."

Shayle Kann, the Managing Director of Greentech Media Solar Research commented, "The Loan Guarantee program has been crucial both in enabling the largest solar projects currently in development and in supporting domestic solar manufacturing. Beyond this, the program is a particularly effective policy tool because it enables the government to leverage a relatively small public investment to mobilize a much larger private sector commitment. An expansion of the program would enable an entire group of large solar projects to move forward that have recently been called into question without the possibility of a loan guarantee."

Or is it, as some conservative groups would have it, a fiscally irresponsible choice when the nation is facing a $1.65 trillion deficit and $14 trillion in debt? What are the fiscal implications of Treasury-backed loan guarantees?

U.S. taxpayer groups and conservative groups held a news conference today to outline their reservations about loan guarantees and a federal government that picks winners in the private sector. I listened in.

Ryan Alexander, president, Taxpayers for Common Sense (note that this non-partisan group also opposes loopholes for oil and gas firms and subsidies for natural gas and ethanol) had this to say: "Facing a $1.65 trillion deficit, taxpayers cannot afford to jeopardize billions on high-risk, capital intensive projects -- projects that private markets steered clear of even at the height of the credit bubble. With appropriations and energy legislation on the horizon, lawmakers must exercise fiscal restraint and not add any money to the Title XVII program or create any new financing mechanisms to fund the same projects like the Clean Energy Deployment Administration proposed in the Senate, which, like Title XVII, would channel money towards massively expensive nuclear reactors, coal plants, and other mature industries."

Andrew Moylan, vice president for government affairs, National Taxpayers Union, said: "Loan guarantees, whether for traditional or alternative energy sources, are nothing more than massive taxpayer handouts to private entities. Like many such programs, they are difficult to track and lack robust oversight. The time has come to shield taxpayers from further losses and end these subsidies."

Moylan added, "The risk should be borne by private entities, not taxpayers." He cited synfuel programs during the Carter administration that failed and ethanol programs that are failing now. Moylan continued, "Don't subsidize any technology." and "Loan guarantees are bad deals for taxpayers."

The National Taxpayers Union is a grassroots taxpayer group fighting for limited government.

Jack Spencer, research fellow, Heritage Foundation, said: "While loan guarantees may be good for the near-term interests of the individual guarantee recipient, they are not good for consumers, taxpayers, or long-term competitiveness. They remove incentives to decrease costs, stifle competition and innovation, perpetuate bad policy, and suppress private-sector financing solutions." He added, "Loan guarantees distort the market place and the allocation of resources. It signals to industry that they don't have to be competitive. It distorts the risk of failure. It removes the incentive to decrease cost."

William Yeatman, energy policy analyst, Competitive Enterprise Institute, said: "In light of our massive budgetary problems, if these green energy investments are too risky for the banks, then they should also be too risky for the American taxpayer." (The Competitive Enterprise Institute is a libertarian think tank.) Yeatman suggested that the number one inhibition to renewables is the power of the PUCs at the state level. He said that "innovation is illegal at the state level."

Yeatman said that "History indicates a Green Bank is doomed," adding that "Government cannot pick winners or losers." He went on to say, "The Green Bank would fail due to political meddling -- political considerations are always a factor." Yeatman also suggested an "uncomfortable correlation between loan guarantee recipients and political contributions to President Obama."

Henry Sokolski, executive director, Nonproliferation Policy Education Center said, "The capacity of this country to waste money cannot be underestimated."

Hard to argue with Sokolski on that. This group of speakers was no more in support of nuclear subsidies than they were for renewable subsidies.

Despite this intensive barrage of free-market, libertarian, less-government advocates, the question remains -- absent subsidies and lower cost capital sources -- how do you kick start an emerging industry like solar or biofuels that is confronted by the decidedly non-free-market incumbents of coal, oil and gas? We can either remove oil and gas subsidies or give these emerging technologies a helping hand.

A Department of Energy spokesperson gave me this comment: “The goal of the Department’s loan guarantee program is to fund innovative, clean energy technologies at scale that would otherwise have a difficult time finding funding in the private markets, while also creating jobs in communities around the country. To date, the loan program has committed to or finalized more than $30 billion in loan guarantees for 29 clean energy projects which have created or saved over 62,000 jobs. The program does not distinguish between technologies, instead focusing on an “all-of-the-above” approach that has resulted in investments in an array of energy sectors including solar, wind, geothermal, transmission, energy storage, energy efficiency, biofuels, nuclear, and advanced technology vehicles.”